Future of affordable housing finance

India's affordable housing finance sector, after years of robust expansion with over 30% growth in assets under management (AUM), is transitioning into a new normal phase. Factors such as a higher growth base, cautious lending due to stress in the MSME segment, and external pressures like potential US tariff impacts have contributed to moderated growth in recent periods. Despite these headwinds, the sector demonstrates strong resilience, particularly in demand for affordable housing in rural and emerging markets.

While isolated pockets of asset quality stress appeared in areas like Tirupur, Coimbatore, and parts of Karnataka, early recovery signals are emerging. This shift raises key questions: Can the sector sustain strong growth amid an expanding base and rising competition? Analysts remain optimistic, projecting medium-term AUM growth of 20-25% for key segments, supported by improving asset quality, moderating credit costs, and favourable interest rate cycles.

The housing finance landscape in India is segmented into three broad categories, as redefined by industry classifications. Large or high-ticket housing finance companies focus on average ticket sizes above Rs 35 lakh. Affordable housing finance companies target the mid-range, with ticket sizes between Rs 15 lakh and Rs 35 lakh. Low-income housing finance companies, including players like Aadhar Housing Finance, cater to ticket sizes below Rs 15 lakh. This segmentation highlights varying dynamics across the spectrum.

A top executive of a housing finance company  noted that the low-income segment has maintained a steady 20-22% CAGR, with his company achieving around 21% AUM growth through the first nine months of the year and expecting to close at over 21%. He emphasized that while the broader housing finance industry previously grew at 26-27%, recent moderation stemmed from supply-side constraints in affordable segments, including land availability, construction costs, and delayed government interventions. However, he described the period as a brief "wait period" rather than a true slowdown, with the industry now rebounding strongly.

Another executive of a public sector bank noted that government tailwinds play a pivotal role in driving this resurgence. Initiatives like PMAY 2.0 (Pradhan Mantri Awas Yojana), the Credit Linked Subsidy Scheme (CLSS), and schemes such as SWAMIH (which funds stalled projects up to Rs10,000 crore) are boosting supply, with plans for 3 crore additional housing units through central and state interventions. These policies, he said, support both self-construction and resale properties, benefiting low-income borrowers. He also highlighted that subsidies under PMAY-CLSS have reached over 90,000 customers in the initial phase and around 15,000 in PMAY 2.0 so far, enhancing affordability across construction types.

A market research consultant mentioned that a key distinction in the low-income segment is customer behavior: approximately 35% of borrowers engage in self-construction, while 30% opt for ready-built or resale properties, reducing dependence on developer-led supply. This makes the segment less vulnerable to traditional supply bottlenecks. He observed positive trends, including upticks in resale registrations in Tier-2 and beyond cities, alongside internal data showing rising self-construction activity, fuelled by government support.

Companies differentiate through a mix of housing loans (for acquisition or construction) and loan against property (LAP), which forms a significant percentage of their housing loan portfolio. Regulatory constraints, such as the principal business criteria requiring 60% of the balance sheet in retail home loans, limit excessive diversification into non-housing products. The customer mix at Aadhar stands at 55% salaried and 45% self-employed, with the latter growing as outreach deepens into Tier-4 and Tier-5 locations where salaried employment is scarcer. 

Demand in semi-urban and emerging towns remains strong, driven by consumer education and engagement. In smaller locations, companies like Aadhar actively promote homeownership, highlighting easy repayments over 20 years and subsidy benefits to shift renters into owners. In contrast, Tier-1 and Tier-2 customers are more inherently aware and often purchase in peripheries.

Overall, the low-income housing finance segment is pegged for 22% growth, affordable at 20%, and the broader industry at 18-19%, according to reports and CEO discussions. Industry leaders remain bullish, viewing this as a sustainable trajectory supported by policy, demand resilience, and operational improvements. The sector's focus on underserved segments positions it for continued expansion in India's push toward inclusive housing.